Economic History of Communist Czechoslovakia

The targets of the First Five-Year Plan (1949-53) reflected the government's commitment to expansion of the producer goods sector of the economy. The goals were dramatically revised upwards after 1949, partly in response to the Korean War, to build up metallurgy and heavy industry. The country became an important supplier of machinery and arms to other communist countries. Foreign trade with noncommunist countries dropped sharply (in part because of trade controls imposed in those countries); trade with communist countries increased from 40 percent of the country's total in 1948 to 70 percent a decade later. The economy failed to reach the ambitious goals of the first plan, although investment and growth were high. By the end of the plan period, serious inflationary pressures and other imbalances had developed, requiring a currency conversion in 1953 that wiped out many people's savings and provoked outbreaks of civil disorder.

The years 1954 and 1955 were covered by yearly plans only; the scheduling change was part of an effort by the members of the Council for Mutual Economic Assistance (Comecon) to correlate and integrate their planning by using common planning periods

The Second Five-Year Plan then encompassed the years 1956-60. During that period, investment continued at a high rate, although real wages and the supply of consumer goods also increased substantially, and national income grew by 6.9 percent. In the late 1950s, however, economic leaders noted that investment efforts were yielding diminishing returns. Large investments were required to sustain economic growth. In 1958 and 1959, in response to this troubling situation, the government made several relatively minor adjustments in the functioning of organizations and prices--the first of the country's economic reforms. The reforms involved some limited decentralization of authority, most notably giving enterprises more autonomy in handling investment funds. The intention was not to alter the Soviet economic model to any great extent but rather to enhance its overall operation. The reforms did not result in noticeable improvements in economic performance, however. Eventually, in 1962, planners quietly scrapped the entire reform program, reimposing most of the central controls.

Many factors contributed to the economy's poor performance, including adverse weather for agriculture, cancellation of orders by China resulting from the Sino-Soviet dispute, and unrealistic plan goals. By this time, however, reform-minded economists had reached the conclusion that much of the blame lay in deficiencies of the Soviet model. They began to prepare additional reform measures to improve the economy's efficiency. Serious defects in the Soviet model for economic development had long been recognized by some Czechoslovak economists, and calls for decentralization had occurred as early as 1954. Economists and others had argued that: it was inappropriate to apply the Soviet model to Czechoslovakia in a dogmatic manner, because:

• The country was already industrialized, had few natural resources and a small internal market, and remained dependent on foreign trade in significant ways.
• The model emphasized extensive development, such as building new factories, rather than intensive investment in which production processes were modernized and efficiency improved.
• The pressure for greater investment and defense production during the 1950s had caused private consumption to grow more slowly than net material product. The result had been a chronic inflationary bias, reflected in shortages of consumer goods and forced savings by the population.
• Plants and construction firms held large inventories of materials to compensate for irregular deliveries from suppliers.
• Completion of most investment projects required an inordinate amount of time, freezing funds in unproductive uses.
• Inadequate investment in agriculture had contributed to the latter's chronically poor performance.
• Prices were also a problem, based as they were on often conflicting policies; prices reflected neither scarcity nor cost, bore little rational relationship to one another in the domestic market, and had become increasingly divorced from world prices.
• The system appeared to stifle innovation and to offer no basis for selecting between investment and production alternatives or for judging efficiency.

• The central planning authorities were to concern themselves only with overall long-term planning and to provide general guidance.
• Enterprises and their associations would be free to determine short-term production targets.
• Individual enterprises were to become financially viable, realizing a profit from their sales.
• State subsidies would gradually end; enterprises that could not operate at a profit would have to close.
• Profit, rather than fulfillment of planned quantitative output targets, was to become the main criterion for evaluating the economic performance of enterprises.
• Producers were to be increasingly exposed to foreign competition, so that they would seek to increase their own productivity and lower prices.
• As a means of earning much- needed hard currencies, exports to Western countries were to be stimulated through incentives encouraging enterprises to make their products competitive on world markets.
• A more realistic system of prices was to replace the centrally determined system. Prices were to reflect actual costs, the supply and demand situation, and relevant world prices. Enterprises were to finance investments with their own resources and interest-bearing bank loans and would have to justify their investments in terms of need, effectiveness, and cost so that widespread waste of investment resources would cease.
• Finally, a revised wage and salary system was to eliminate egalitarianism in the wage structure and substitute a system based on individual work performance and on results obtained by the employing enterprise.

Czechoslovak reformers did not intend to permit free play of market forces. They had implemented only a portion of their program by August 1968, when Soviet and other Warsaw Pact troops invaded the country and the reform experiment came to an end. The next two years saw the gradual dismantling of most of the program. By the early 1970s, almost all traces of the reform measures had vanished.

In the late 1960s and early 1970s, the Czechoslovak economy continued to grow at a respectable rate throughout the period. From 1966 to 1970, the period of the Fourth Five-Year Plan, net material product grew at an average annual rate of 6.9 percent, well exceeding the planned yearly increase of 4.1 to 4.4 percent.

Performance was still gratifying during the Fifth Five- Year Plan (1971-75). During this period, net material product grew somewhat more slowly, averaging 5.7 percent yearly, but still exceeded the planned rate of 5.1 percent yearly. Wages, incomes, and personal consumption levels rose at respectable rates despite an overall increase in investment. Agriculture continued to be a weak area but had improved markedly. By 1975 the agricultural sector was almost self-sufficient in animal production, and self- sufficiency in crop production appeared to be an attainable goal. Rural wages rose, and mechanization progressed rapidly.

During the Sixth Five-Year Plan (1976-80), by contrast, economic performance was far less satisfactory; in the closing years of the period, the slowdown in economic growth became especially noticeable. Net material product grew by only 3.7 percent yearly on average, instead of the 4.9 percent called for by the plan. Both agriculture and industry and productivity increase failed to meet planned growth targets Problems in agriculture were in part a result of drought (1976) and severe winter and spring flooding (1979). Other factors, such as shortages of agricultural machinery and spare parts and poor quality of fertilizer, also had an impact on the agricultural sector. Large imports of grain necessarily continued. During the plan period, growth rates in personal consumption declined, reaching a low point of 0.5 percent in 1979. At the same time, in contrast to the previous plan period, retail prices rose by about 11 percent over the 5-year period. During the last few years of the plan, there were widespread consumer complaints about the unavailability of basic commodities such as meat, milk, and vegetables. The economy's performance was lackluster despite the continuing infusion of substantial investment funds. In part, the rise in the investment rate in the 1970s reflected large capital expenditures for increased mining of coal and other fuels and for the development of engineering branches to produce equipment for nuclear power plants. Nevertheless, given the considerable funding poured into the economy, the mediocre condition of the Czechoslovak industrial plant in general at the end of the 1970s must have been discouraging to economic planners.

The energy and trade problems Czechoslovakia faced in the late 1970s were also major factors in the slowdown in industrial growth. The terms on which Czechoslovakia conducted foreign trade had begun to deteriorate sharply by the mid-1970s. After 1974 the rapid rise of world oil prices was partially reflected in the price of oil from the Soviet Union, Czechoslovakia's principal source of fuel and raw materials. Prices of other materials on which the country's economy depended also increased faster than the prices of its exports, which consisted primarily of manufactured goods (especially machinery). Party and government leaders were cautious about increasing foreign indebtedness and attempted to maintain a high level of exports. Increasingly in the 1970s, a substantial portion of the country's production of consumer goods and machinery was diverted to export markets to meet the rising import bill. Restraints on imports from noncommunist countries reduced inputs for domestic industries.

Economic planners set relatively modest growth targets for the Seventh Five-Year Plan (1981-1985), revising their goals downward two years into the plan. "Intensification" of the economy--focusing on efficient use of resources rather than simply quantitative growth--was the keynote of government policy.The early years of the Seventh Five-Year Plan saw a serious slump in the economy. During 1981 and 1982, personal consumption actually declined. The cost of living rose more rapidly than wages. During the final three years, however, an economic recovery made up for the earlier poor performances; according to official calculations, the country succeeded in either meeting or surpassing domestic goals during the plan period as a whole. Results of the "intensification" effort were disappointing, however, as leaders acknowledged. During the plan, consumption of energy decreased by only 1.7 percent per annum, less than the 2 percent goal of the plan .

The relatively favorable outcome of the Seventh Five-Year Plan was noteworthy, particularly because several international trends had had negative effects on the Czechoslovak economy during the period. A recession in developed Western countries dampened their markets for Czechoslovak exports; and in 1981 the Soviet Union announced its intention to scale back oil exports to Eastern Europe, including Czechoslovakia, by 10 percent. Although in 1983 and 1984 worldwide prices for oil began to drop, the Comecon (or Soviet) price, tied to a 5-year formula, caused the price of Soviet oil (16.4 million of the 16.6 million tons imported by Czechoslovakia in 1984) to continue to climb. In 1982 the decision of Western banks to restrict credit to Eastern Europe as a result of Poland's serious payment problems and the sizable debts of other East European countries impeded Czechoslovakia's foreign trade with the West.

The poor performance of the economy in the early 1980s persuaded party leaders that some changes were needed. Therefore, in conjunction with the Seventh Five-Year Plan, in 1981 the government introduced a series of limited reforms called the "Set of Measures to Improve the System of Planned National Economic Management after 1980." Relatively conservative in design and initiated without fanfare, these reforms permitted somewhat greater freedom of action for managers of enterprises in selected operational areas, giving them more authority over their own investment activities and over providing financial incentives to workers. The intention was to make industry as a whole more aware of prices and costs. The reforms did not call for any appreciable loosening of central planning and control. In 1982 parallel reform measures were introduced for agriculture; the measures permitted farm officials to exercise greater management initiative and limited the number of binding targets imposed on farm production. Many Western observers believed that these reforms did have a helpful effect during the final years of the plan. It was felt, however, that these partial reforms were not sufficiently comprehensive to bring about the modernization and improvements in efficiency sought by Czechoslovakia's leaders.

In the mid-1980s, Czechoslovak leaders acknowledged the persisting weaknesses in the country's economy and its need to modernize more rapidly. Although the government announced no major reforms in conjunction with the Eighth Five-Year Plan, in 1987 an experiment was begun involving about 120 industrial enterprises. These enterprises were to receive only key planning figures from the central authorities; otherwise, they were to have increased autonomy in planning production, seeking profitable forms for their activities, and managing their own finances. The reforms represented a significant step beyond the modest "Set of Measures" of 1981, which had retained strict central controls.This was a cautious response to the more ambitious reforms sponsored by General Secretary Mikhail Gorbachev in the Soviet

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Data on late 1987 to 1989 need to be added.